It is the little signs that give you an early warning that something important may be happening. In this case it is the matter of US house prices, for, as here in the UK and in some other markets, it has been a housing boom that has helped support consumption growth. Now, it seems, the boom is over.
For me, the moment of clarity was going through immigration into the US a few weeks ago. "You're a journalist, so what do you write about?" asked the officer. I duly explained - "Oh, so you do macro then ... so tell me what's gonna happen to interest rates?"
I then found myself having a thoroughly detailed interview for the next 10 minutes about US economic trends and, in particular, the housing market. They had just had another baby, they wanted to move to something bigger but he really did not want to make a bad financial decision and trade up when house prices might fall.
An hour later, in the back of a car rolling through Connecticut, it was almost the same conversation. Here, however, the driver felt he couldn't move in the same district because of the rise in prices and he was wondering whether it would make sense to move further out to get more space. But then there was the worry about gas prices and the impact that would have on relative property values.
Then just 10 days ago, I had another conversation, this time in Washington DC. In the plush area around Dupont Circle, which has seen some of the sharpest gains in recent years, I was told that prices were now falling.
So it came as little surprise to read in yesterday's Washington Post a report that the median price of a house in several parts of the metropolitan area was lower than it had been a year earlier, the first such decline for six years.
Of course in the US, as everywhere, housing markets are local. Nationally prices are still up, though for existing homes (as opposed to new ones) the year-on-year rise is now just 1 per cent (see first graph). But the stock of housing on the market is now equivalent to about seven months' sales against a normal four months. Given the size of this overhanging stock, a sharper decline is possible, particularly if mortgage rates continue to rise. A 30-year mortgage now carries a rate of 6.8 per cent, whereas in the UK there are 25-year fixed mortgages at about 5.5 per cent.
All this will seem pretty familiar to Britons, for we had a similar pause in our housing market in the first part of last year. Then, last summer, interest rates were cut and there has subsequently been a modest recovery in both prices and housing activity.
That may indeed be what happens in the US too. The Federal Reserve is close to the top of its tightening cycle, though there may be one or two more increases to come. The US does have a more serious inflationary problem than we did, and do, but then it already has somewhat higher interest rates. True, a higher proportion of US mortgage debt is fixed, but Americans are just as over-borrowed as we are, on some measures more so, so they are as pressured by rising interest rates as we would be.
Still, at the moment it looks as though the US housing market has hit a sharper downturn than we experienced here. Charles Dumas at Lombard Street Research calls it a disaster zone and forecasts a fall in consumption and GDP in the first quarter of 2007.
That leads to the key question for the world economy. If the US housing market really bombs, how far will the growth of consumption there fall back?
Here in the UK we were bustling along with consumption growing between 3 per cent and 5 per cent a year from 1996 through to 2005, but now that is down to about 1.5 per cent a year. And of course while what we do is not material to the world economy, what the Americans do is. You can do the sums. The US accounts for about 30 per cent of world GDP and closer to 40 per cent of incremental demand. Consumption is equivalent to 70 per cent of US GDP. So if it slows from its average of about 4 per cent a year to say 1.5 per cent, that could knock one-third off the world's incremental growth next year.
Will it happen? Consumer expectations are certainly very weak. One of the main indicators of that, the Michigan index, is charted along with actual consumer spending in the other graph, with the index advanced one month. Insofar as the "fit" continues to hold, this would indeed suggest consumption growth slowing to below 1 per cent a year. Capital Economics, which did the chart, thinks that consumer expectations may fall further still. So while zero or negative growth in consumption may not happen, it is certainly a plausible possibility.
How long that situation might continue for is another matter. Interest rates would start to fall. One would expect oil demand to fall too and, given the impact of US consumption on the world, that would help take the pressure off world energy prices. Factor in the hope of a return to stability in the Middle East and you could start to see some easing of global inflationary pressures, which in turn would make it easier to justify the US cutting rates.
In short, there is a strong possibility of a bump in the US economy in the early part of next year, and the greater the disarray in the US housing market the greater the magnitude of that bump. But if US growth really does grind to a halt, then there would be cuts in interest rates that would support the housing market and help restart growth.
My main concern is that such a bump, what would be considered a "hard landing" from the growth trajectory, would come as a shock. It is not really in the mainstream forecasts. It would be regarded as a failure of the Fed for having raised rates too far, which would be bad for the credibility of its new chairman, Ben Bernanke. That would be unfair, for the seeds of the US housing boom were in the long period of too-low interest rates promoted by his predecessor. But it would be unsettling none the less, and it would be unsettling not just for the US but for the rest of the world.
For a long time, one of the possible triggers for the next global slowdown seemed to be a sharp fall in the US housing market. We are not yet there, and if the UK experience is any guide the US will be able to engineer a soft landing. It is simply not possible to judge at this stage.
But I think I would stick by what I said to that immigration officer. That was that people should buy houses that they wanted and needed to live in, rather than regarding a home principally as an investment. I didn't think interest rates would go through the roof, but I reckoned that if he waited a bit there might be some better bargains around.